We’re greater than three-quarters of the best way by means of the Q3 earnings season for the dear metals sector, and one of many first gold producers to report its outcomes was Torex Gold (OTCPK:TORXF). Regardless of a marginal drop in gold manufacturing yr over yr, the corporate had a blow-out report financially, with internet debt now extinguished as of quarter-end. Sadly, the inventory’s post-earnings advance has been erased, with Torex being dragged down by the sector-wide carnage. Whereas that is disappointing, it is left the intermediate producer buying and selling for under US$110.00/oz, and additional weak spot might make the inventory a takeover goal. Based mostly on the greater than cheap valuation and continued operational excellence, I see this pullback under C$19.00 as a low-risk space to begin a place.
Torex Gold launched its Q3 results earlier this month and reported quarterly gold manufacturing of ~131,800 ounces, a 5% lower from the year-ago interval. Whereas this headline quantity would possibly look disappointing, it is necessary to notice that the corporate was up towards very robust comps in Q3 2019 as a result of this was a report quarter for the corporate, with head grades coming in at an astounding 4.11 grams per tonne gold. Subsequently, whereas gold manufacturing was down yr over yr, this was nonetheless an distinctive quarter for Torex. Moreover, the upper common realized gold (GLD) value greater than offset the marginal lower in output, as income soared to a brand new report excessive of US$258.5 million. Let’s take a more in-depth take a look at the quarter under:
As proven within the desk under, it was a strong quarter at Torex’s El-Limon Guajes Mine, with throughput coming in at an 18-month excessive of 12,870 tonnes per day, simply shy of the report 13,011 tonnes per day in This autumn 2018. In the meantime, gold restoration charges have been secure at 89% for the sixth quarter in a row, regardless of a slight drop in grades yr over yr (3.83 grams per tonne gold vs. 4.11 grams per tonne gold). If not for the 7% lower in processed grades, this may have been a report quarter for gold manufacturing.
As proven under, the numerous enhance in gold manufacturing and gross sales led to a considerable enchancment in all-in sustaining prices, with prices down 13% sequentially from the US$1,015/ozin Q2. These elevated prices in Q2 have been as a result of government-mandated shutdown in Mexico, and it is good to see prices return to extra regular ranges since. Nevertheless, prices have been up greater than 20% yr over yr at US$877/ozvs. US$675/ozin Q3 2019. This was partially associated to larger royalties of US$7.6 million (Q3 2019: US$5.9 million) on account of larger income, and a better common realized gold value, in addition to considerably larger sustaining capital. Throughout Q3 2020, the corporate spent an extra US$16.3 million on sustaining capital expenditures (US$25.2 million vs. US$8.9 million), with larger capitalized stripping in addition to infrastructure.
Whereas the sharp enhance in prices is a bit disappointing, it is necessary to notice that that is inside Torex’s up to date steering vary of US$965/ozto US$1,025/ozfor FY2020. Presently, all-in sustaining prices are sitting at US$941/ozyear-to-date, suggesting that Torex should not have any difficulty beating its steering mid-point of US$995/oz. Moreover, all-in sustaining price margins hit a brand new report of US$1,007/ozwithin the quarter, up from US$803/ozwithin the year-ago interval. This materials enlargement in margins was associated to a considerably larger common realized gold value of US$1,884/ozin Q3 that greater than offset the upper prices.
Through the ready remarks, the corporate famous that they’ve blasted at Portal 3 within the quarter, which ought to result in mining efficiencies going ahead. The entry at Portal 3 ought to permit Torex to learn from 50% shorter underground haul distances, and extra exploration potential going ahead. Presently, the tunnel is 1 kilometer lengthy, and Torex expects to achieve the underside of Sub-Sill by Q3 2021. This could result in decrease prices going ahead, which might set the corporate up for $1,050/ozplus all-in sustaining price margins if the gold value can maintain above $1,825/oz.
Given the quarter of near-record gold manufacturing at report gold costs, it isn’t shocking that Torex delivered a report quarter operationally. As proven within the chart above, quarterly income soared to US$265.5 million, a rise of 34% yr over yr, regardless of comparable manufacturing ranges. This translated to a big enchancment in Torex’s steadiness sheet to US$204.0 million, in addition to a surge in free money circulate to a report of US$124.2 million. Presently, trailing twelve-month free money circulate is sitting at $169.4 million, which implies that Torex is buying and selling at lower than 7x free money circulate at an enterprise worth of US$1,133 million. It is value noting that trailing twelve-month free money circulate ought to be sitting at nearer to US$200 million however was affected by the shutdowns in Q2 which put an enormous dent in quarterly gold manufacturing and income.
Much more thrilling for long-term buyers is the truth that Torex has lastly extinguished its internet debt place, ending Q3 with a internet money place of US$77 million and excellent debt of simply US$155 million. This could result in improved earnings going ahead on account of decrease curiosity expense, and I’d anticipate the corporate to totally repay its debt by the tip of Q2 2021. Whereas the corporate has no plans for a dividend right now, I’d not be shocked by share buybacks if the share value falls under US$13.00. Some buyers is perhaps upset that Torex just isn’t paying a dividend, whereas another intermediate producers like Alamos Gold (AGI) are providing buyers a wholesome dividend yield. I do not see this as a difficulty as a result of Torex is aggressively re-investing in its enterprise with exploration and continued funding in Media Luna, which could possibly be operational by early 2024 if they’ll fast-track the mission.
Regardless of an unbelievable quarter for Torex, the corporate is buying and selling at a decrease degree than when it reported on November third as a result of sector-wide weak spot. This has left Torex buying and selling at a market cap of ~US$1.20 billion, a dirt-cheap valuation for a Tier-2 jurisdiction 400,000-ounce per yr gold producer. In reality, if we subtract out the corporate’s US$77 million in internet money, we have got Torex buying and selling at an enterprise worth of US$1,133 million. Based mostly on 10.4 million ounces of gold assets, this interprets to an enterprise worth per ounce of simply US$108.94. This compares fairly favorably to the 4-period shifting common of the value paid per ounce for gold producers this yr.
As proven under, we have seen six mergers or acquisitions this yr, and the typical value paid per ounce has been US$101.32/oz. Most lately, Teranga Gold (OTCQX:TGCDF) was valued at US$175.79/ozlast week with its marginal premium within the Endeavour Mining (OTCQX:EDVMF) deal. Not solely is Torex in a extra favorable jurisdiction than Teranga in Mexico vs. Africa, nevertheless it’s additionally received a bigger manufacturing profile and comparable prices. Subsequently, it is fairly unusual that Torex is buying and selling at a greater than 30% low cost to the current Teranga deal and a ten% low cost to the 4-period shifting common of the value paid per ounce for gold producers.
Whereas a reduction would make sense for a high-cost producer in a particularly unfavorable jurisdiction, Mexico just isn’t a horrible jurisdiction by any means, even when it is not Tier-1, and the corporate has an enviable useful resource relative to its friends. The one adverse with Torex is that it is a single-asset producer presently, however I don’t consider this justifies this huge of a reduction to what suitors have paid for producers this yr. In abstract, Torex is dirt-cheap under C$19.00. I’ve not thought of the corporate a takeover goal previously, but when we have been to see a drop under US$17.00, I might see a suitor swooping in to choose up this 450,000-ounce producer that is pumping out almost US$200 million in free money circulate per yr whereas it is on sale.
Torex Gold simply got here off an unbelievable quarter, but the inventory is buying and selling prefer it missed steering or had an enormous flaw in its current report. The inventory was already low cost forward of the current sell-off, however Torex is now buying and selling at a greater than cheap US$108.94/ozbased on its 10 million-ounce useful resource base. As famous, it is a 10% low cost to the 4-period shifting common of the value paid per ounce for gold producers by suitors. Given the corporate’s operational excellence and industry-leading margins, I consider this sell-off under C$19.00 is making a shopping for alternative for buyers. Subsequently, I could look to begin a place in December if we see the inventory stabilize.
Disclosure: I’m/we’re lengthy GLD. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Extra disclosure: Disclaimer: Taylor Dart just isn’t a Registered Funding Advisor or Monetary Planner. This writing is for informational functions solely. It doesn’t represent a proposal to promote, a solicitation to purchase, or a advice relating to any securities transaction. The knowledge contained on this writing shouldn’t be construed as monetary or funding recommendation on any material. Taylor Dart expressly disclaims all legal responsibility in respect to actions taken primarily based on any or the entire data on this writing.